Friday, March 20, 2015

Integrity in Financial Services – A question of real leadership

An important story in today’s newspapers deals with former
trader Paul Robson who has been banned for life from the UK financial services
industry by the FCA following a conviction for fraud in America, the
regulator's first public action against a trader for manipulating Libor
submissions.

In 2014
Robson, who worked at Rabobank, pleaded guilty in a New York court in August
2015 to his part in a conspiracy to manipulate Rabobank’s Yen Libor submissions
to benefit trading positions.

As a
result, he has been banned for lacking ‘honesty and integrity'.

This ban
comes ahead of Robson's 2017 sentencing in the US and the FCA's proceedings
were stayed due to ongoing criminal proceedings since they issued Robson with a
warning notice in 2013.

FCA
acting director of enforcement and market oversight Georgina Philippou said: 'No
excuse can be made for Mr Robson’s behaviour, which was particularly serious.
He was the primary submitter of Yen Libor at Rabobank for a number of years and
experienced in the market.

'He knew
what he was doing was wrong. This ban reinforces our expectation that
individuals and firms take responsibility for ensuring market integrity and
reminds them of the consequences if they fall short of our standards.'

This
story is important for a number of issues.

Firstly,
it raises the vexed question of the lack of dynamic action by the FCA and the
SFO against a UK-registered individual for a particularly dishonest and grubby
criminal offence involving the criminal manipulation of the LIBOR benchmark.
Why was the criminal case left to the Americans?

Now, it
may be that the SFO had decided to let the case lie while they observed what
their US counterparts wanted to do about it. It would not be too far from
reality to observe that if there were US defendants involved in the conspiracy,
and the US prosecutors had taken the lead in the investigation, then the trial
might more properly be allowed to take place in New York.

It seems
this is probably what has happened, and Robson will later be sentenced by the New
York Courts in 2017, no doubt when other similar cases arising out of the same
circumstances have been finalised.

This case
does raise more issues however, issues which have to do with integrity and
moral transparency, and which underpin an argument for the need for a greater degree
of strategic leadership.

This
issue of strategic leadership was also amplified by the actions of former HSBC
boss, Lord Green, the former chief executive and chairman of HSBC, who has just
revealed his “dismay” and “deep regret” over the tax evasion row that has
engulfed the bank.

The
HSBC veteran admitted that management had made mistakes during his time at the
lender, which coincided with alleged moves by its Swiss private bank to help
wealthy clients hide billions of pounds in order to escape taxes in the
mid-2000s.

What
sheer bloody hypocrisy!

This
man, who refuses to answer any questions over what he knew and how he knew it
about the tax evasion scandal was a career banker. I have every expectation
that he knew all about Swiss banking methods and tax evasion issues. If he didn’t,
which I don’t for one second believe, then he was remarkably ill-informed, but
his career tells a different story.

In
January 2005, Green became Chairman of HSBC Bank plc, the group's UK clearing
bank subsidiary, and Group Executive Chairman in June 2006. In its July 2005
issue, Bloomberg Markets magazine reported that HSBC was allowing money
laundering by drug dealers and state sponsors of terrorism; the magazine
alleged that this had included a transfer of $100,000 in April 2000 to the Taliban
in Afghanistan which had subsequently resulted in a fine levied by the US
Treasury Department.

Green
denied the allegations, calling them “a singular and wholly irresponsible
attack on the bank’s international compliance procedures”. Subsequent
investigations however, confirmed that money laundering had taken place at the
bank for several years throughout Green's tenure as Chief Executive and
Chairman, chiefly for the Sinaloa Cartel. It is widely reported that Stephen Green
earned well over 25 million pounds per year at the time, although it is hard to
quantify the exact amount.

Green's
successor as the top of HSBC, Stuart Gulliver, said “between 2004 and 2010, our
anti-money laundering controls should have been stronger and more effective and
we failed to spot and deal with unacceptable behaviour”.

So what
did ‘Lord Green of See No Evil’ think his Swiss Bank was doing for UK clients,
selling cuckoo clocks?

For
this man to talk about setting high standards, is a travesty and an abuse of
the ordinary meaning of words. This was not leadership, it was a deliberate and
willing avoidance of the truth, and he needs to go and ponder the parable about
camels, rich men and the eyes of needles before he spouts any more hypocritical
tosh!

Edwin
Sutherland, the US criminologist tried to enunciate an explanation for such
behaviour among white collar workers, in his book ‘White Collar Crime’, in 1939.
Sutherland defined it as;

“...A
crime committed by a person of respectability and high social status in the
course of his occupation...“

In other
words, a crime committed by someone who would otherwise not be thought of as a
typical criminal type or a person likely to commit crimes.

In his
theory of “Differential Association”, Sutherland posited that criminal
behaviour is a result of a process of socialization, during which criminal
“definitions” (ideas) are not only transmitted culturally,but are actually learned through social
interactions with trusted intimate groups.

Learned
behaviour is neither invented, nor inherited. The skills and techniques
required for criminal activity are not innovations, and they are not
automatically obtained from birth.

Criminal
behaviour is learned. Just as one learns to prepare a meal, so too one learns
to cheat a client or manipulate a benchmark.

They are
acquired through a process of learning from others in the same milieu.

Sutherland
states that one learns criminal behaviour through social interaction and
communication with others in the same ‘trusted’ group.

This
communication-based discovery occurs during the learning process about criminal
activities. One may come to learn about bank crime through discussion with
others, but also by witnessing the responses of the others towards the
activity, such as maintaining a group silence about the practice, if questioned
by supervisors.

Most learning
of crime and deviance takes place in interaction with members of intimate,
personal groups, such as fellow employees in a department or on a trading desk.

The
greater implication of this proposition is that it locates trust at the
root of those social interactions which encourage deviance.

New
employees would be likely to first learn how to mis-sell products or manipulate
a benchmark from their close associates within the close group or team, rather
than from mere general acquaintances.

Sutherland’s
concept of learning identifies what is acquired through communication with
intimates that facilitates criminal activity.

Through
this learning process an individual gains not only the skills and techniques required
to commit the crime, but also what Sutherland called the “motives, drives,
rationalizations, and attitudes” that accompany the behaviour.

Not every
employee who learns, commits offences. Instead, Sutherland calls attention to a
subjective component which individuals also have to learn, or adopt, the
social, cultural and psychological attitudes that drive a violation of the law.

Such
rationalizations and attitudes also explain the common excuse for criminal
behaviour which is that it is warranted or deserved.

“There
are no laws against it”.

“Everyone
is doing it – it must be ok” What David Matza would later call ‘Techniques of
Neutralization”.

If what they do is not perceived by themselves, their sub-cultural peers
or professional colleagues to be criminal because they have jointly accepted
that the law does not apply to them in these circumstances, then regardless of
Parliamentary intention or definition, any attempt by legislators to provide
systems of regulatory control, particularly those which depend upon
self-regulation for their authoritative administration become futile.

This is
why there is such a need for strong moral leadership within the banking milieu!

If
employees learn that their colleagues are rewarded for cheating, stealing,
manipulating benchmarks or otherwise indulging in thinly disguised criminal
behaviour, the more likely they will be to indulge in the same dishonest conduct
themselves.

If
earning objectives are set so high that it means that employees will need to
cheat and steal to achieve those targets, then there should be no surprise if
that is what happens.

Once
management has instilled the idea that criminality is rewarded, while turning a
blind eye to the provenance of the revenues being driven, employees will adopt
these methods as a matter of course.

Remember,
criminal conduct is what Sutherland defined as a ‘learned process’, and being
rewarded for doing wrong is the fastest way to create an unstable and
dysfunctional workforce.

So, when
Paul Robson was engaging in his dishonest conduct, he was merely demonstrating
his teaching and demonstrating that he had learned well.

What on
earth would have possibly otherwise encouraged a man with a senior (and
presumably well-paid job) to engage in such blatant criminal conduct. He must
have known that what he was doing was dishonest, so why did he do it?

Clearly
he had observed too many examples of others getting away with similar behaviour
until such a time when it became unremarkable to him. However, he must also
have known that management would remain untroubled by his actions, as long as
he was making a profit!

Where
management fail to provide the necessary degree of example of good business
models and fair conduct, then their staff and direct reports will quickly learn
how to manipulate the working environment to their own benefit.

This is
why I suggest that senior directors of banks who conduct themselves like Lord
Green of ‘Hear no Evil’, fail to provide the necessary degree of leadership and
good example to their staff which will overcome the tendency to resort to
criminal conduct.

Banking
crime is not necessarily a foregone conclusion, nor does it need to be, but
until such time as bank Boards start demonstrating a far greater degree of
leadership and ethical suasion, and stop making pious excuses when it can be
amply demonstrated that they were failing to lead the enterprise in an
effective manner, cases such as that demonstrated by Paukl Robson will continue
to proliferate.

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!